Is India’s soulless rally losing heart?2 min read . Updated: 25 Sep 2018, 10:11 AM IST
Investors may manage to find some so-called safe havens now and then, but valuations will eventually need to catch up with fundamentals for all stocks
After the rout in the stock market on Friday, India’s policymakers went all out to soothe investors’ frayed nerves. The Reserve Bank of India and the Securities and Exchange Board of India made an unusual statement on Sunday saying they are ready to take appropriate actions, if necessary. On Monday, the finance minister tweeted that the government will take all measures to ensure that adequate liquidity is provided to non-banking financial companies, mutual funds, and small and medium enterprises. State Bank of India chairman Rajnish Kumar issued a statement and appeared on television to do his bit as well.
But none of this helped. The Nifty 500 index fell by 1.9% on Monday, worse than the 1.3% drop on Friday. And but for a rise in the share price of market heavyweights Tata Consultancy Services Ltd (TCS) and Reliance Industries Ltd, the fall in the market would have been worse.
Why did the market disregard all the reassurances that came its way? One reason could be that the advice from all quarters to avoid panic was taken as a cue that there are indeed underlying reasons to worry.
More importantly, the scare about a liquidity crunch has worked as a trigger for a much-needed correction in the Indian market. As one private equity fund manager put it recently, “India’s equities rally has been a soulless one." The reference is to the rise in the large-cap indices, despite major headwinds such as the rise in oil prices and the depreciation in the rupee.
The market has responded to these concerns by booking profits in some stocks, while increasing allocations to a select few sectors and stocks. With monthly inflows into domestic mutual funds in the region of a billion dollars, there has been sizeable money chasing stocks, at a time when fund managers should ideally have been selling.
On Monday, too, TCS shares rose by about 5% and the Nifty IT index rose by over 2%. Evidently, investors are looking for safe havens. While their reaction is understandable, what it has done is to increase valuations of these stocks to unreasonable levels. For all the talk of increased demand for IT services, hardly any of the large IT companies are reporting a meaningful increase in growth rates. Besides, the gains from the depreciation in the rupee are expected to be temporary as well.
It’s likely that the rally in large-cap indices such as the Nifty 50—which is still up 4.2% year till date—is in its last legs. Investors may manage to find some so-called safe havens now and then, but valuations will eventually need to catch up with fundamentals for all stocks.
Thankfully, outside of the top few stocks, the rest of the market has been correcting this year. The Nifty Next 50 index, for instance, has fallen 10.5% this year, while the Nifty Midcap index has fallen 15.6% and the Nifty Smallcap index has corrected by 26.1% so far this year.